Commentary

When founders are the wrong CEO pick

Commentary: Michael Dell is not who Dell needs

JohnShinal

SAN FRANCISCO (MarketWatch) — At what point will Michael Dell realize he wasn’t the right choice to reinvigorate his namesake company?

Let’s hope soon, for the sake of Dell Inc.
DELL
investors. Since he returned as chief executive in April 2007, the company’s share price has fallen by more than 50%.

That’s a severe underperformance compared with the broader market for technology stocks, as the Nasdaq Composite Index
COMP, +0.15%
is up more than 20% during that time.

If you look at the adjacent five-year chart comparing the two, the trajectories of their respective lines reflect the real world even more than on most graphs.

That’s because the one company most responsible for the Nasdaq’s five-year rise, Apple Inc.
AAPL, +1.72%
is also the company most responsible for Dell’s weak financial performance during that same time.

By now, every tech investor should know that sales of Apple’s iPads and laptops are hurting Dell and other PC makers.

Michael Dell and his company’s board of directors should know that too. The question is, what are they doing about it?

A mixed historical record

The return or departure of a founding chief executive is never a small thing; the emotional baggage surrounding such a move causes turmoil among employees, and is often traumatic for shareholders.

Many Apple employees wept when Steve Jobs was forced out of Apple in 1985, and the company shriveled to a niche PC player without him. Likewise, many greeted his return in late 1996 and 1997 as the second coming of a messiah. It turned out to be exactly that, of course, for Apple workers and shareholders.

Reuters

Michael Dell

On the other side of the spectrum, you have the experience of Yahoo Inc.
YHOO
where co-founder and longtime board member Jerry Yang was tapped for the top job in June 2007.

Yang’s first major move was also his worst for shareholders: the thwarting of a takeover bid from Microsoft Corp.
MSFT, +0.00%

At the time, Yahoo workers cheered Yang as he led the company’s board in adopting a poison-pill defense that prevented the software giant from acquiring a marquee company in Silicon Valley, where anti-Microsoft feelings run deep. Unfortunately for Yahoo investors, that move cost them roughly $30 billion in market value.

It was quite possibly the worst example of fiduciary duty that a founding CEO and board of directors have ever served upon a tech company’s shareholders. It’s not surprising that Yang eventually severed all ties to the Web portal.

When Michael Dell, for his part, returned to his company a little more than five years ago, the ascension of Apple was just gathering velocity. Although the iPhone and iPad already were in development, Apple had yet to unleash them on the marketplace.

But Apple already had been reinvigorated by the return of Jobs, and its stock price reflected that.

Visions of former glory

Perhaps this was on the mind of Dell when he decided to return to run the business he founded in a college dorm room in the mid-1980s. He certainly had a stellar track record of serving shareholders, as Dell was the single best-performing tech stock of the 1990s.

During that decade, with Dell at the helm, the company’s shares rose a staggering 900-fold. That means any investor who put $5,000 into Dell in 1990 was sitting on stock worth $4.5 million at the beginning of 2000.

That performance not only made Michael Dell a fabulously wealthy person. It also gave him a level of credibility — with his board, investors and with Dell employees — that made it easy for them to cheer his return.

Yet the company’s very success during the boom years likely sowed the seeds of Michael Dell’s failure as a returning chief, because it’s not easy for executives to tear apart a successful business they’ve spearheaded.

What Dell has needed and still needs is a radical transformation, one that includes jettisoning some products and exiting businesses that have been at the core of the company.

Yet what Michael Dell has done is mostly to add more to what he’s already built. During his second tenure, Dell has acquired a list of hardware products that is both wide and long — everything from handheld computers to storage and networking products.

The result: Dell’s product portfolio looks more like that of Cisco Systems Inc.
CSCO, +0.12%
than of Apple. Given that, it should be news to no one that the company’s growth has fallen far behind that of its PC rival, or that its share price has lagged so badly.

To be sure, Dell is far from alone in getting steamrolled by Apple. In fact, shares of Hewlett-Packard Co.
HPQ, +0.15%
have fallen slightly more than Dell’s during the last five years.

But an argument that says “it could be worse, our stock could be down 60% during my tenure, rather than 50%,” is not an argument that will comfort Dell shareholders.

Given the level of credibility Michael Dell has with the board’s directors, it’s highly unlikely that there will be any move to oust him. Let’s hope someone in the boardroom (perhaps even the chief executive himself) will have the vision to at least consider his exit.

After five years, it’s pretty clear that Michael Dell is not the right person to engineer a Dell revival.

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